"Retirement Spending Smile"

Phossy

How Total Spending Declines Over Time In Retirement (kitces.com)
Interesting article  on how retirement spending declines (and why the 4% drawdown rule is probably overkill). If I read it right, any uptick in health related spend in the latter years doesn't really have the expected impact due to the greater overall decline in spending. Perhaps more a lop-sided smile.. (Note it is a US based article)

The end summary " Nonetheless, the bottom line of the Blanchett study is that it clearly reinforces that financial planners should be assuming some level of spending cuts for most clients in retirement (unless their net worth and spending is so modest that it's sheerly impossible for any spending declines to occur without curtailing basic subsistence), especially for married couples who would also likely experience additional spending declines in later years when at least one spouse is likely to have passed away. While that doesn't diminish the importance of managing unknown health (and long-term care) concerns, and maintain a contingency for such expenses, the reality appears that for most retirees, the impact of such rising expenses in the final years is still not enough to offset the general level of decline in retirement expenditures that occur as retirees transition from go-go to slow-go and finally to no-go years. And the difference is not trivial, as Blanchett's research suggests that, once these adjustments are taken into account, retirees may need as much as 20% less to retire than what traditional models have assumed!"

drumtochty

Or they may not need 20% less than the models advise. this is similar to the theories of Wade Pafu etal in the states  I can advise we are not reducing our spending but in saying that we have no need to. Further we are finding many people well short of retirement that we are having to assisit in various ways as the increaseing number of people on normal wages are finding it hard to make ends meet.

Albermarle

Phossy said:

How Total Spending Declines Over Time In Retirement (kitces.com)
Interesting article  on how retirement spending declines (and why the 4% drawdown rule is probably overkill). If I read it right, any uptick in health related spend in the latter years doesn't really have the expected impact due to the greater overall decline in spending. Perhaps more a lop-sided smile.. (Note it is a US based article)

The end summary " Nonetheless, the bottom line of the Blanchett study is that it clearly reinforces that financial planners should be assuming some level of spending cuts for most clients in retirement (unless their net worth and spending is so modest that it's sheerly impossible for any spending declines to occur without curtailing basic subsistence), especially for married couples who would also likely experience additional spending declines in later years when at least one spouse is likely to have passed away. While that doesn't diminish the importance of managing unknown health (and long-term care) concerns, and maintain a contingency for such expenses, the reality appears that for most retirees, the impact of such rising expenses in the final years is still not enough to offset the general level of decline in retirement expenditures that occur as retirees transition from go-go to slow-go and finally to no-go years. And the difference is not trivial, as Blanchett's research suggests that, once these adjustments are taken into account, retirees may need as much as 20% less to retire than what traditional models have assumed!"

It makes sense but it is all based on averages. You might be one of the ones who need to spend more.

Pat38493

Phossy said:

How Total Spending Declines Over Time In Retirement (kitces.com)
Interesting article  on how retirement spending declines (and why the 4% drawdown rule is probably overkill). If I read it right, any uptick in health related spend in the latter years doesn't really have the expected impact due to the greater overall decline in spending. Perhaps more a lop-sided smile.. (Note it is a US based article)

The end summary " Nonetheless, the bottom line of the Blanchett study is that it clearly reinforces that financial planners should be assuming some level of spending cuts for most clients in retirement (unless their net worth and spending is so modest that it's sheerly impossible for any spending declines to occur without curtailing basic subsistence), especially for married couples who would also likely experience additional spending declines in later years when at least one spouse is likely to have passed away. While that doesn't diminish the importance of managing unknown health (and long-term care) concerns, and maintain a contingency for such expenses, the reality appears that for most retirees, the impact of such rising expenses in the final years is still not enough to offset the general level of decline in retirement expenditures that occur as retirees transition from go-go to slow-go and finally to no-go years. And the difference is not trivial, as Blanchett's research suggests that, once these adjustments are taken into account, retirees may need as much as 20% less to retire than what traditional models have assumed!"

When I am in looking at the graph of the smile in the article (figure 5), are the blue dots in that graph the individual samples?  If so, aren't there way too few samples to actually conclude anything at all?

Also - on the same chart am I understanding that the x axis is the percent of pension withdrawal change per year?  So it means expenditure is going down by 1% per year.  So if it spends 5 years at the minus 1% position that is a cumulative 5%+ reduction in expenditure compared to the start?  At first I thought it just meant that total spend was down by 1% which is hardly even material.

Bostonerimus1

Be careful with US based retirement articles as US retirees have costs for health care that are very different from UK retirees.

Phossy

Indeed - I expect they they are much higher

Linton

Rather than assume you will be steadily spending less over the years I think it is better to create a separate pot to pay for ticking off your travel bucket list or whatever you want to do in the early years of retirement.  And when the money has gone that's it.  But you keep the money allocated for day to day living expenses constant in real terms.  After all you have become accustomed to that standard of living over many years, it is unreasonable to force your fiture self into what you may consider as poverty at an age when change becomes difficult to handle.

Assuming that day to day expenditure decreases is I think an unjustified increase in risk.  You can get the same effect by say increasing your assumed investment return. Neither change reality, they merely increase the risk you are prepared to accept. What the average person does is irrelevent.

Pat38493

Linton said:

Rather than assume you will be steadily spending less over the years I think it is better to create a separate pot to pay for ticking off your travel bucket list or whatever you want to do in the early years of retirement.  And when the money has gone that's it.  But you keep the money allocated for day to day living expenses constant in real terms.  After all you have become accustomed to that standard of living over many years, it is unreasonable to force your fiture self into what you may consider as poverty at an age when change becomes difficult to handle.

Assuming that day to day expenditure decreases is I think an unjustified increase in risk.  You can get the same effect by say increasing your assumed investment return. Neither change reality, they merely increase the risk you are prepared to accept. What the average person does is irrelevent.

Good points however this might well be what the people in the study did before they retired.  As far as I understood it, the study was about what the people really spent during their retirement regardless of what they had available.

Linton

Pat38493 said:

Linton said:

Rather than assume you will be steadily spending less over the years I think it is better to create a separate pot to pay for ticking off your travel bucket list or whatever you want to do in the early years of retirement.  And when the money has gone that's it.  But you keep the money allocated for day to day living expenses constant in real terms.  After all you have become accustomed to that standard of living over many years, it is unreasonable to force your fiture self into what you may consider as poverty at an age when change becomes difficult to handle.

Assuming that day to day expenditure decreases is I think an unjustified increase in risk.  You can get the same effect by say increasing your assumed investment return. Neither change reality, they merely increase the risk you are prepared to accept. What the average person does is irrelevent.

Good points however this might well be what the people in the study did before they retired.  As far as I understood it, the study was about what the people really spent during their retirement regardless of what they had available.

There seems to be a key bit of information missing - the richer you are the more discretionary expenditure you can afford.  If for eample you are a multi-millionaire used to having a new car and several expensive holidays every year then sure your expenditure will decrease considerably when you get older.  On the other hand if you are basing your retirement on barely making ends meet planning on expenditure decreasing over time would be foolish, if anything you may need more.

This is why I suggest for planning purposes you have separate pots for essential and discretionary expenditure.  "essential" being what you consider necessary for an acceptably comfortable life style, not what you could possibly live on were there no other choice.

OldScientist

For the US, Blanchett and the earlier report by Bernicke ("Reality Retirement Planning: A New Paradigm for an Old Science") disagree on the precise spending profile.

Work has also been done in the UK, for example

Brancati et al ("Understanding retirement journeys: Expectations vs reality") who found that, on average, household consumption decreased by 1.4% per year.

However, Karjalainen et al ("Patterns of spending in retirement") suggested that the much, if not all, of the decline can be explained by differences in cohorts such that "when controlling for cohort differences we find that overall spending does not change as much as the simple age profile suggests".

In other words, it may not be as clear cut as Blanchett's research suggests.

Returning to the US, it is interesting to note that Pfau (see https://retirementresearcher.com/type-retirement-spender-will/ ) says "Spending may decline, so I would not fault anyone for using assumptions of gradual real spending declines such as 10% or even 20% over the retirement period. But pending further research developments, I would avoid moving too far in the reduced spending direction as a baseline assumption."

OldScientist

Linton said:

Pat38493 said:

Linton said:

Rather than assume you will be steadily spending less over the years I think it is better to create a separate pot to pay for ticking off your travel bucket list or whatever you want to do in the early years of retirement.  And when the money has gone that's it.  But you keep the money allocated for day to day living expenses constant in real terms.  After all you have become accustomed to that standard of living over many years, it is unreasonable to force your fiture self into what you may consider as poverty at an age when change becomes difficult to handle.

Assuming that day to day expenditure decreases is I think an unjustified increase in risk.  You can get the same effect by say increasing your assumed investment return. Neither change reality, they merely increase the risk you are prepared to accept. What the average person does is irrelevent.

Good points however this might well be what the people in the study did before they retired.  As far as I understood it, the study was about what the people really spent during their retirement regardless of what they had available.

There seems to be a key bit of information missing - the richer you are the more discretionary expenditure you can afford.  If for eample you are a multi-millionaire used to having a new car and several expensive holidays every year then sure your expenditure will decrease considerably when you get older.  On the other hand if you are basing your retirement on barely making ends meet planning on expenditure decreasing over time would be foolish, if anything you may need more.

This is why I suggest for planning purposes you have separate pots for essential and discretionary expenditure.  "essential" being what you consider necessary for an acceptably comfortable life style, not what you could possibly live on were there no other choice.

Blanchett's report did investigate whether the decreases in spending were voluntary or necessary by looking at four different groups by spend and net worth between the ages of 65 and 75, and further classified these into two additional groups, “matched” (i.e. low spend and low net worth, high spend and high net worth) and “mismatched” (i.e. low spend and high net worth, high spend and low net worth). While the 'smile' appears to be the only thing that ever seemed to be discussed, there was somewhat more than that in the report.

Of course, whether US results are relevant to the UK is another question (medical costs/insurance is something we don't currently have to budget for).